Week7_ Gopal (2012)_Yaeeun Kim

In the vendor-client relationship, how to govern the relation is important, however, the effect depends on the hazard. The study mentions two gaps. First gap is the moderating effect of risk exposure on the benefit of relational governance. According to the prior studies, in the presence of formal contracting, relational governance has a significant impact on the outcomes of economic activities. On the other hand, relational governance provides symmetric benefits to all parties. In a way of understanding the contradicting findings, this study focused on the positive effect of relation on mitigating risk. This suggests that the parties who take larger risks might be more beneficial as a result. Second, the effect of relational governance on enhancing values differed by the dimensions of outsourcing (e.g. quality and profitability). However, it is important to understand that when there is not equivalently expected hazard size, why would the other party would accept the relational governance if the party is not be a beneficent as the other party. Relational governance highlights flexibility in the environment of projects, resulting in more beneficial to immediate project rather than long-run project.

To test hypotheses, 105 projects was collected from a software service frim. The relational governance is inherently required for this area since software service firms outsource, and the relationship between the vendor and developer is important. From the findings, the study shows that relational flexibility positively affects profitability in only fixed price contracts, where the vendor faces greater risk, while positively affecting quality only in time and materials contracts, where the client is at greater risk. Service quality was measured by question items.

Overall, relational governance (relational flexibility) is beneficial for profitability depends on the type of contract. As expected, the effect of relational flexibility on profitability is moderated by FP contracts. However, the effect of T&M contracts was insignificant on the effect of relational flexibility on project profit.